IPO + Snapchat = Camera Company

Earlier this month, the parent company of Snapchat, Snap Inc., went public as a “camera company” rather than what most people consider it to be: an ephemeral photo sharing app. The much-anticipated initial public offering (IPO) of the ephemeral photo sharing platform exceeded expectations in terms of its valuation: $28 billion.
This amount, as The Guardian put it, places Snapchat “ahead of Twitter, currently valued at $11bn, a tech company that was similarly hyped ahead of its IPO but that has proved a disappointment to investors.” They went on to say that the valuation “creates a serious rival for Facebook, which has come to dominate social media and online advertising and has shown clear signs that it regards Snapchat as a potential threat.”
But before getting too hysterical and foretelling the end of Facebook and Twitter at the hands of Snapchat, it’s worth looking at the idea of the IPO a little more critically. After all, after Twitter’s much-anticipated IPO in 2013, the company has not managed to find a revenue model that will sustain its future growth. By all accounts, Twitter’s future as a leading social network is anything but certain. This lesson teaches us that just because a company is able to come out with a record-breaking IPO, that doesn’t necessarily mean it is destined for success.
In terms of usership, Snapchat’s numbers are fairly solid. According to MarketWatch, “Snap reported that its ephemeral messaging service had 158 million daily active users at the end of 2016, and an average of 2.5 billion ‘snaps’ are created on Snapchat every day.” However, as we know, usership in the startup sense does not necessarily indicate revenue growth. In fact, in 2016, Snap operated at a burn rate of $611 for its operations and its net profit loss was $515 million.
Some critics see this usership versus revenue distortion as a central problem of using the IPO as a critical indicator of success. High usership usually equates to a high valued IPO, but high usership does not indicate high revenue. As one critic wrote in USA Today of Snap’s IPO, “The problem is that this company will no longer be using its own money for growth or shareholder return — it will now be using the funds of the investing public. Keep in mind as well that their product is basically a trendy idea, which is subject to the whims of the generation of people they appeal to. Therefore, it is very difficult-to-impossible to accurately forecast their long-run prospects, which should be the basis for good investing.”
This perhaps indicates the reason why Snap went public on the premise that it is a camera company, rather than a more trendy—and thus volatile—social network. As Snapchat’s chief executive Evan Spiegel insists, Snapchat opens on the camera function, which is what sets it apart from other competitors who open on a newsfeed of other people’s content.
“The beautiful thing is it sort of sits in the middle, but more importantly it opens to the camera,” Spiegel said. “The thing that feeds a social network is content… Similarly with communication… So in our view, when you take a snap and you choose this path between talking to your friends or adding it to your Story we end up with this harmony where both of these businesses feed themselves. I don’t think it’s one or the other.”
While that may sound like wishful (or maybe inventive) thinking, you can see why Spiegel would perhaps be keen to position his company more as a hardware brand than a software brand. Perhaps despite his company’s high IPO, he still feels the need to offer shareholders something more than mere eyeballs. Equally, investors and tech pundits should think similarly about the IPO and think less about what stock market says a company is worth, and more what that company actually offers its users or demographics moving forward.